Settlement Trusts

About Settlement Trusts

A trust can provide you with some of the same advantages of structured settlements without the flexibility concerns or liquidity issues. A trust is a legal document that instructs a money manager, who you select, how to manage the money and how to pay it out to you.

The money manager typically is a trust company who will charge a yearly fee for managing the trust. The fee typically ranges from 1 to 2 percent of the assets they are managing. The interest that the trust company earns for you through investing and managing your money should more than offset the fee in most cases. Unlike a structured settlement, the interest earned from a trust is taxable. If you receive public benefits such as Medicaid or SSI, it may be necessary to create a special type of trust to keep you eligible for those benefits. The law provides for a unique kind of trust called a Special Needs Trust which can be established for the disabled, preserving eligibility for public benefits. In addition, if you receive Medicare benefits a Medicare Set Aside trust may need to be established to keep you eligible for Medicare.

Trusts are flexible because the trust document allows the trust company power to adjust to changes in your life. You may find it desirable to have a settlement trust established that is used in conjunction with a structured settlement annuity. A lump sum amount could be placed into the trust and the structured settlement annuity payments could be made into the trust over a fixed period so that you get the benefit of a tax-free investment but also some extra flexibility.

What is a Settlement Trust?

Many injury victims have needs that are uncertain, unpredictable, subject to change, event contingent or indeterminable as to timing and amount. These needs require a liquid and flexible pool of money set aside to address those needs. A Settlement Trust can be the perfect solution for these types of needs. These trusts are typically an irrevocable trust that is established with part of the recovery from your personal injury lawsuit that is designed to protect your recovery from dissipation while making funds available to you in amounts and at times real financial need arises. It can be accessed for most any of your needs yet is professionally managed to maximize your money. The trust is created to be sufficiently adaptable in order to accommodate virtually any important change in your future financial profile.

The settlement trust offers custom money management by a fiduciary (a trust company) that can help you achieve greater growth of your money. The trust can adapt and change to your specific monetary needs and can pay for those unexpected expenses. You can arrange for periodic payments to you from the trust which can be increased during periods of unemployment or other short-term changes in your situation. Annuity based structure settlement payments can be blended with a trust to create a better balanced settlement for you. Installing the trust and depositing funds into the trust does not require the approval or the cooperation of the defense. The trust does not create the “estate tax liquidity problem” that is inherent in other settlement vehicles.

What is a Special Needs Trust?

A special needs trust (“SNT”) is necessary for those who receive SSI or Medicaid. A SNT is a trust whose corpus or any assets held in the trust do not count as resources for purposes of qualifying for Medicaid or SSI. Thus a personal injury settlement can be placed into a SNT so that an injury victim can continue to qualify for SSI and Medicaid. Federal law authorizes and regulates the creation of a SNT. 42 U.S.C. §1396p(d)(4)(A)-(C) governs the creation and requirements for such trusts. First and foremost, an injury victim must be disabled in order to create a SNT. There are 3 primary types of trusts. First is the (d)(4)(A) trust which can be established only for those who are disabled and are under age 65. This trust is established with the personal injury victim’s settlement money and is established for the victim’s own benefit. Second is a third party SNT which is funded and established by someone other than the personal injury victim (i.e., parent, grandparent, donations, etc. . .) for the benefit of the personal injury victim. The victim still must meet the definition of disability. Third is a (d)(4)(c) trust typically called a Pooled Trust (described in more detail in another section) that may be established with the disabled victim’s funds without regard to age restriction.

As a general rule, a SNT can pay only for things that benefit the Medicaid recipient for whom the trust was created. It can provide for medical items or services Medicaid does not currently cover or to improve the quality of life of the Medicaid recipient. However, a Medicaid recipient that establishes a SNT cannot have unrestricted access to the money in the trust to spend at his or her whim.

An injury victim has to live with the restrictions that come with public assistance eligibility if they establish a SNT. The trust funds can only be utilized to meet the “supplemental “or “special” needs of the beneficiary. However, supplemental or special needs are interpreted quite broadly and include non-Medicaid covered medical and dental expenses, attendant care (24 hours or as needed), durable medical equipment, supplies, rehabilitation services (respiratory, physical, occupational, speech, visual and cognitive), transportation (including vehicle purchase), vehicle maintenance and insurance. This is by no means a comprehensive list. The trust can pay for any medical needs if Medicaid does not already provide for those needs.

The trust can also pay for non-medical items, such as vacations, travel to visit relatives or friends, electronic equipment (including MP3 player, CD players, televisions, DVD players and computer equipment), camps, educational needs (private school, college or technical school tuition), and other monetary needs that enhance your child’s quality of life, comfort or situation. The trust generally cannot pay expenses that are “food and shelter”, which are part of the SSI disability benefit payment. Nevertheless, even “shelter” expenses are broadly defined and would exclude payments by the trustee directly to a cleaning service employed to clean an injury victim’s home. If the “food and shelter” rules are violated, the SSI payment can be reduced but an injury victim can still remain eligible for Medicaid as long as they receive one dollar of SSI per month or apply independently for Medicaid.

A SNT is an irrevocable trust. However, if an injury victim’s situation changes and public assistance eligibility is no longer an issue, the trust could be reformed by court order or possibly terminated by judicial action. If the trust is reformed, the trustee would still make the assets available to the trust beneficiary and it would operate as any other trust fund would operate. The trustee would no longer have to worry about keeping the injury victim eligible for public assistance. The trust would continue to meet the injury victim’s financial needs. Medicaid would still have to be repaid for services they provided from the date of creation of the trust until it is reformed. Similarly, if the trust were to be terminated, Medicaid would have to be repaid first before any assets are distributed.

Pursuant to 42 U.S.C. §1396p(d)(4)(A), a SNT can only be established “if the State will receive all amounts remaining in the trust upon the death of such individual up to an amount equal to the total medical assistance paid on behalf of the individual under a State plan under this subchapter.” Thus any funds remaining in the trust at death first go to repay Medicaid for any and all benefits they have provided the SNT beneficiary over his or her lifetime. The recovery is only for benefits provided subsequent to the creation of the trust. Therefore, if a third party lien was satisfied at the time of a personal injury settlement, the recovery from the trust would only be for accident related benefits provided after satisfaction of the lien. However, there could be Medicaid services provided prior to or during the treatment for the accident which gave rise to the lien that are not accident related that will have to be paid back out of the SNT.

What is a Medicare Set Aside?

Medicare and Social Security Disability Income (hereinafter SSDI) benefits are not income or asset sensitive. If you meet Social Security’s definition of disability and have paid in enough quarters you can receive disability benefits without regard to your financial situation. SSDI is funded by the workforce’s contribution into FICA (social security) or self-employment taxes. Workers earn credits based on their work history and a worker must have enough credits to get SSDI benefits should they become disabled. Medicare is a federal health insurance program. Medicare entitlement commences 2 years after the date of disability under Social Security’s definition. Medicare coverage is available without regard to your finances.

If you have Medicare coverage, you have to worry about the Medicare Secondary Payer (MSP) statute. The MSP is a series of statutory provisions enacted during the 1980s as part of the Omnibus Reconciliation Act with the goal of reducing federal health care costs. The MSP provides that if a primary payer exists, Medicare only pays for medical treatment relating to an injury to the extent that the primary payer does not pay. In certain cases a Medicare Set Aside is required in order to preserve future eligibility for Medicare coverage.

A Medicare set aside (hereinafter MSA) is a tool that allows an injury victim to preserve Medicare benefits by setting aside a portion of the settlement money in a segregated account to pay for future Medicare covered. The funds in the set aside can only be used for Medicare covered expenses for your injury related care. Once the set aside account is exhausted, you get full Medicare coverage without Medicare ever looking to your remaining settlement dollars to provide for any Medicare covered health care. Medicare, may in certain circumstances, approve the amount to be set aside in writing and agree to be responsible for all future expenses once the set aside funds are depleted.

If you are currently a Medicare beneficiary and you settle your case you may need an MSA. If you have a “reasonable expectation” of Medicare enrollment within 30 months of the settlement date and the total settlement amount exceeds the amount set by the Centers for Medicare and Medicaid Services then you may need an MSA. Assuming you fall into one of these two categories, you may need to establish an MSA because if you do not you could lose Medicare eligibility for your personal injury related conditions.

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